Public Policy and the Public Interest

Lok-sang Ho

• Publisher: Routledge
• Year: 2013
• ISBN:
  9781136651069
• Edition: 1
• Topic: Economics
• Subtopic: Economic History
• Index: Economics

As a book on public policy, this book is unique in addressing explicitly the role of human nature. Only with a good understanding of human nature can policy makers address their foremost needs and anticipate how people may respond to specific designs in policy. This way policy makers can avoid "unintended consequences." The book also provides a new perspective on the meaning of public interest, which is based on intellectual roots dating back to J.S.Mill and more recently Harsanyi and Rawls.

Traditionally, economists have referred to either the Hicksian criterion or the Kaldorian criterion as the yardstick to whether a policy is welfare enhancing, not realizing that both of these criteria fail abjectly in producing a convincing test for welfare improvement. This is because ex post, typically some people will gain and some people will lose from any policy. The author argues for an alternative, ex ante welfare increase criterion that is based on how people would assess a policy if they were completely impartial and totally ignored their personal interests. It applies the principles to key policy concerns such as health policy, tort law reform, education and cultural policy, and pension reform.

The healthcare reform proposals in the book illustrate the application of the principles. The author proposes a basic protection plan under which standard basic healthcare services are priced the same whether they are provided by public or private caregivers—at levels that can contain both demand side and supply side moral hazard. Annual eligible healthcare expenses are capped to alleviate worries. A "Lifetime Healthcare Supplement" that includes an element of risk sharing adds to patients' choice and protection without compromising fiscal sustainability.

Foreword 1

It is a great pleasure to have the opportunity to make some introductory remarks about this treatise on public policy analysis and decision making. This is truly an inspiring book. It is written by an economist who has, over a long period of time, been both an observer of public policy and a participant in the process. This experience lends weight to the message of the book. Public policy must be impartial; it must serve all the people; it must be open; and it must be multidisciplinary in its approach. Perhaps most critical, good governance is a necessary condition for success, no matter how well-founded is the form of policy. Good governance is a difficult and tenuous requirement. The formal trappings of democracy are not sufficient: democratically elected governments can fall prey to corruption and capture by special interests even in the freest of nations. Checks and balances, free and open debate, and institutional accountability are among the safeguards needed to induce governments to act in the interest of their people. As Lok Sang Ho persuasively argues, examples exist of reasonably good governance in the absence of full democracy, and of poor governance in apparently democratic states.

There are no easy answers to the fundamental policy issues of our time. What is the role of government? How large should it be? How should social insurance programs, like health care and pensions, be designed? How much redistribution is warranted in a society that respects property rights? What is the best way to facilitate a law-abiding and mutually respecting citizenry? How can social capital be enhanced? How do a society’s ethical norms and practices inform policy? Lok Sang recognizes that these key policy issues permeate all spheres of public decision making and necessarily involve a multidisciplinary approach. The economic approach to collective choice has much to recommend it as a methodology, but it alone will not suffice. Human nature must be taken into account so that policies that seem in the abstract to be ideal will be accepted and respected by the public. In the absence of a willing public, coherent public policies would not be possible. Citizens must respect the law to obey it; they must respect government behavior to be willing to pay their taxes; and they must accept the fairness of social protection policies in order for those policies to operate effectively.

Lok Sang argues persuasively that a litmus test for fair public policies is that they would be based on the judgment of an impartial observer. He argues that

each citizen can achieve such impartiality by imagining themselves behind a veil of ignorance, not knowing their wealth, talents, preferences, gender, race, or date of birth. In this approach, following Mill, Harsanyi, and Rawls, a representative person will not know whether they will gain or lose from public policies and will be more likely to decide fairly. Wisely, Lok Sang does not take a doctrinaire position on what precise rules the representative citizen would follow in these hypothetical circumstances, so his proposals for the important policy issues facing governments today are intended as merely offering a direction rather than a definitive answer to solve all the problems. This would involve not just economic values ascribed to the representative citizen, but also matters of social norms and beliefs, including religious and humanist ones, human behavior, the determinants of human happiness, governance, and history. Instead, he argues for this ex ante evaluative approach as a template that should guide decision makers in their choices and citizens in their consent, and gives numerous examples of how the approach would play itself out.

The approach is economic in its methodology, weighing benefits and costs, taking into account resource constraints, and other constraints such as imperfect information and the complexities of individual decision making. But it is much broader than economics as we normally understand it. This makes the approach quite unique compared with other books on economic policy and applied welfare economics. As mentioned, it is also more far-reaching in its span, covering not just standard government economic policy issues, but also broader ones like law and order, culture, the treatment of harmful substances, and environmental issues. The book also reflects the author’s broad understanding and command of the relevant literatures on behavioral economics, happiness, social capital, and the unusual dynamics of financial markets.

The book is a delight to read. It is replete with examples in many policy areas and many countries. The various applications show how valuable the ex ante methodological approach can be, especially when duly tempered by the importance of good governance. The combined emphasis on social consensus as perceived by the ex ante representative citizen and good governance can change the focus of public policy discourse. For example, as Lok Sang suggests, posing the question “how big should government be?” is not as meaningful as asking “how can we make government more effective and accountable whatever its size?”

This book has a wide natural audience, and is written with them in mind. Policy makers, scholars of all disciplines, students, journalists, and anyone interested in thinking about the important policy issues facing modern governments will all find something of value in this book. I recommend it highly.

Robin Boadway

Queen’s University, Canada

Foreword 2

The privilege of scholarship carries with it a responsibility to promote the good society. Philosophers take the lead in helping us think about what defines the good society. Social scientists also have a role to play because the implications of alternative collective choices, including coercive public policies, for improving society require the prediction and assessment of consequences. Researchers produce much evidence about the impacts of specific policies and policy analysts draw on such work to design and assess possible changes to public policy. Too rarely do policy researchers step back from the details of particular policy issues to revisit the question of the good society through the lens of social science knowledge. Lok Sang Ho courageously does so in this provocative book.

I do not use the word provocative lightly. There is much in this book that provokes, including clearly stated propositions that highlight potentially controversial claims. Indeed, I find some of the propositions vexing. For example, my reading of the empirical evidence leads me to reject the claim that electoral competition among parties for control of the government is unnecessary for a credible commitment to the rule of law. Perhaps reflecting American parochialism, I am also skeptical about limits on free speech, which I generally view as weakening a very valuable institution offering general and long-term benefits in order to avoid specific and short-term harms. In view of these strong objections, my willingness to write a foreword for this book should make clear that I nonetheless find it to have substantial merit.

That merit lies primarily in the important issues it raises for policy scholars. One of these issues, how we should conceive of the public interest and use this conception to guide policy choice, has long been a central concern of normative political theory. Another issue, the implications of human nature for public policy design, has begun to be addressed by cognitive psychologists and behavioral economists but remains secondary in much policy analysis and debates about public policy. The third issue, institutional design as a form of policy design, has received little explicit attention. By raising these important issues, and offering insight into how they can be addressed, Professor Ho makes a valuable contribution to policy scholarship.

Professor Ho adopts the “veil of ignorance” framework introduced by John Harsanyi and famously applied by John Rawls as the basis for thinking about the public interest. Where other policy scholars have largely limited application of the framework to thinking about how we might agree on the good society writ large, Professor Ho brings the concept closer to the world of the policy researcher or analyst by applying it to specific policy issues. Despite the inherent limit in this approach because of the necessity of agreeing on the preferences for risk the representative person takes behind the veil, I see sufficient merit in the applications to make a case for pursuing this approach further.

Policy researchers should not have to be reminded about the importance of understanding human nature in predicting (and valuing) public polices. Policy researchers tend to build models for interpreting empirical evidence and predicting the consequences of policy changes based on theories within their primary disciplines. Economists, whose powerful theories and methods have come to dominate most areas of policy research, are especially vulnerable to disciplinary blinders that prevent a full appreciation of human nature, including aspects that are relevant to predicting and valuing policy impacts. Behavioral economics recognizes this vulnerability and seeks to integrate some of the findings of cognitive psychology into the neoclassical economic framework. I share Professor Ho’s view that, as policy researchers, we must seek to take account of human nature as it is. We are starting to see some attention to these concerns in policy design, such as in the recognition that opt-in and opt-out rules can produce very different behavioral responses despite trivial differences in net benefits to choosers. There is certainly much more room for taking account of human nature in predicting policy impacts. Additionally, those of us who cling to welfare economics generally, and cost–benefit analysis specifically, as the basis for injecting information about efficiency into the political process must consider the implications of human nature, manifested in such phenomena as addiction and habitual behavior and preferences over social distributions and processes, for our valuations of impacts.

Professor Ho appropriately draws our attention to institutional design as a way of promoting the good society. In terms of policy design, he focuses primarily on what Aidan Vining and I have labeled “framework regulation” and offers propositions about the consequences of several important institutional features. Professor Ho also considers the importance of culture and values, which are the informal institutions that round out the social, economic, and political environments in which people make choices. He reminds us that institutional design is also an approach to policy design. For example, as I have discussed elsewhere, in the United States the direct policy of closing antiquated military bases was not politically feasible but an institutional design involving delegation of responsibility for assembling a set of candidate closures with Congress tying its own hands by committing to consideration of the set under a closed rule was politically feasible and did result in base closings. Or, again in the US context, does the delegation of authority for designing rules for the allocation of cadaveric transplant organs to an organization of private stakeholders rather than a government agency promote fairness and the appropriate use of evidence? Based on my own experience and Professor Ho’s arguments, I believe that giving more explicit attention to developing both specific and general knowledge relevant to the design of institutions should be a central concern of the policy sciences.

I expect this book to stimulate valuable discussion among policy scholars of these important topics.

David L. Weimer

Madison, Wisconsin

Foreword 3¹

It is a pleasure to read this well-written book and an honor to write the foreword.

The breadth of coverage of this book is phenomenal. Apart from the general principles of public policy design discussed in Part I, it covers a whole range of hot policy issues from education, health care, tort law reform, legal aid, social security, to the global financial tsunami. It also ranges from the efficiency issues to the distributive issues. I admire Professor Ho’s ability to tackle such a wide range of issues. Also, I am more confident dealing with the ultimate principles for public policy in general. Practical issues are more diverse and they involve many aspects with conflicting considerations. Thus, we have the joke about the government’s dislike for economists with two hands. This consideration makes me admire even more the ability and courage of Ho. Moreover, while I expect few readers to have complete agreement with Ho on all issues discussed in this book, I am confident that most readers will find, as I have, many enlightening discussions and thought-provoking ideas. Thus, I have no hesitation in recommending this book to readers.

I find some of the proposals courageous, even provocative, and perhaps outrageous to some. For example, many readers may find the suggestion of corporal punishment of criminals (Chapter 4) barbaric. I strongly suggest that such readers should carefully consider the arguments put forth by Ho. Personally, I sympathize with such readers. The mental image of corporal punishment may be disgusting. It would be much better if more “civilized” methods like imprisonment could achieve the same purpose without even more undesirable effects. Corporal punishment may also be counter-productive in cases. However, on balance, I am convinced by Ho’s argument that imprisonment is often worse than corporal punishment. I prefer the use of fines as far as possible. If either corporal punishment or imprisonment is needed, I will side with Ho in opting for the former, with the exception of truly dangerous criminals who must be prevented from harming more innocent victims. In particular, imprisonment imposes higher costs on innocent people, particularly the family members of the convicts. If a person is convicted of a crime, why should the innocent spouse, children, and possibly parents suffer the very serious damage of long separation? They may be dependent on the convict for financial and personal care and love. In many cases, it is these innocent people who suffer more from the imprisonment than the convict himself. While corporal punishment may also impose damage on family members, the magnitude is certainly smaller than that of imprisonment in most cases. By concentrating damage on the convict, corporal punishment is much fairer than imprisonment. Moreover, as Ho convincingly argues, imprisonment is likely to cause much more differences in the effective punishment on different persons even from the viewpoint of the convicts themselves, since the opportunity cost of prison time varies tremendously from person to person. The dislike of corporal punishment is usually based more on the very superficial emotion triggered by the vivid mental image than on the cool analysis of justice. Ho’s proposal deserves serious attention. His proposals on education and cultural policy in Chapter 10 also merit close examination.

Another provocative proposal is that of a 100 percent inheritance tax, which he recommends as socially desirable and just if—and only if—the government is in the position to support the education and basic living expenses of children (Chapter 4). An economist is likely to disagree with the desirability of such a drastic measure, believing that the inefficiency of discouraging savings and distorting choices may be too high. While such inefficiencies have to be taken into account, economists tend to ignore another type of inefficiency—rich parents tend to give too much inheritance to children to their disadvantage in terms of happiness, if not in terms of money. Having too much money to start with is usually corrosive of one’s characters and bad for self-reliance and personal development. Also, the prevalence of relative-income effects (on which Frank (1999) is highly recommended reading) may mean that most of us are overworking from the viewpoint of social optimality, and some discouragement through a 100 percent inheritance tax may really be desirable. Perhaps a compromise that provides a basic exemption and a sliding scale of tax-rates fast approaching 100 percent may be desirable. Also, it may be desirable to combine with Meade’s (1964) suggestion that the rate of tax should not be a function of the size of the estate of the deceased but a function of the size of the total assets inclusive of the bequeathed amount of the recipient.

On health care (Chapter 5), Ho proposes an annual spending limit of about 6 percent of the mean household income for a household of average size, over which society will reimburse all the medical expenditures. I suggest an improvement upon this proposal by replacing the single limit separating full self-payment with full reimbursement with at least two limits separating full self-payment, part self-payment (i.e., part reimbursement), and full reimbursement to increase the range where individuals still have some incentives to economize on medical expenditures.

The global financial tsunami discussed in Chapter 13 is a new chapter added for this edition of the book, and it further testifies to the importance of understanding systematic effects of public policies that Ho has emphasized all along. In his discussion of the role of the US dollar in Chapter 15, under the title “Public policy in the new millennium,” Ho proposes the use of a new unit of account called the “World Currency Unit” (defined as a basket of key currencies each indexed against inflation and with reference to some base year). I am excited to learn that he has developed a website that provides daily quotations of the unit in twenty currencies. I hope readers will find this free service useful and that the WCU will eventually be used for quoting commodity prices and for denominating bonds, as Ho proposes. This is a more representative unit than the currently used US dollar. With the decreasing relative importance of the US economy, the shift will become more important.

When first reading through Chapters 2 and 3, my first reaction was that many of the propositions may be debatable or insufficiently justified. However, I found it difficult to fault most propositions after further thoughts. For example, following Proposition 3.6 in Chapter 3, which discusses the universality of human nature, Ho says that “all human beings have the same true utility (happiness) function.” I was first inclined to disagree. Then I realized that if all factors explaining personal differences are put as elements in the function, then we may at least in principle make it the same function.

I do have differences with Ho. In his discussion of human nature in Chapter 3, Ho makes the distinction that “happiness is the state of total well-being...

Table of contents

• Cover
• Title
• Copyright
• Dedication
• Contents
• Figures
• Tables
• Foreword 1
• Foreword 2
• Foreword 3
• Preface
• 1 Introduction: Government as servant of the people
• Part I The theory of public policy design
• Part II Risk management
• Part III Resource allocation and redistribution
• Part IV Public policy and "ecology" of the economy
• Notes
• Bibliography
• Index